WHAT IS REASONABLE CARE?

A recent decision issued by the Court of International Trade provides the trade community with a broad interpretation of “lack of reasonable care” for purposes of penalty assessment under 19 USC 1592. It is a significant decision for both importers and brokers.

The case, United States v. Farhan Khan, Slip Op. 17-85, was decided on July 13,2017 and involved an appeal of a penalty case issued by CBP against the importer for misclassification of imported products.

The products in question were wine bottle bags, wine bottle wraps and can wraps. At the time of entry, the importer classified these items under HTS 4202.92.1000 as “insulated cooler bags of PVC” with a duty rate of 3.4%. However, after a Request for Information was submitted to the importer and a review of the products, CBP reclassified the items under HTS 4202.92.90 as “other bags and cases of sheeting of plastics or textiles….”with a duty rate of 17.6%. Customs disagreed with the importer’s position that the wraps were “insulated” for purposes of HTS 4202.92.1000.

However, in addition to reclassifying the items and rate advancing the entries involved, CBP also initiated a penalty case under 19 USC 1592, claiming that the importer violated this statute at the time of entry as he did not use reasonable care in classifying the goods. Of significance to this case is the fact that the importer did seek the advice of his licensed Customs broker. CBP expects that importers will seek the advice of “experts” when questions such as the correct classification of a product arise.

It is important to note that the broker provided the importer with 3 different possible HTS provisions in the span of about 30 minutes. In the last e-mail to the importer, the broker states that he and the manager had reviewed and believed that the correct provision was HTS 4202.92.1000, after offering earlier HTS provisions of 4202.92.90 with a duty rate of 17.6%, then under HTS 4202.92.08 with a duty rate of 7%.

CBP stated that the importer should have taken additional steps to resolve any potential discrepancies between the offered HTS provisions and that merely accepting the provision of HTS 4202.92.1000 was not exercising reasonable care. To that end, CBP and the Court of International Trade, both stated that the importer should have considered seeking the advice of another expert, such as a consultant or attorney, researched the CROSS rulings module available on the CBP website, or considered filing a binding ruling request.

The CIT decision states the following regarding reasonable care:

Here, Defendant failed to exercise reasonable care because he failed to undertake the steps a reasonable importer would have taken to verify that the classification listed on the entry documents was correct. With respect to the entries of Wine Bottle Wraps and CoolCan imported merchandise, Defendant fails to allege that he provided marketing photographs, instructions, or other documentation with respect to the Wine Bottle Wraps and CoolCan merchandise to Priority One. As a matter of law, Defendant cannot have reasonably relied upon Priority One’s advice to classify the Wine Bottle Wrap or CoolCan merchandise while only providing it with documentation concerning the CoolSack merchandise.

Further they stated the following:

Under these circumstances, a reasonable importer would have taken some further steps to investigate the proper classification given the uncertainty created by the broker’s disparate recommendations in
such a short time. Yet, Defendant admits that he never questioned or further discussed Priority One’s recommendation prior to importation despite uncontroverted evidence that the broker offered three separate recommendations in a span of less than 20 minutes.

For this reason, the CIT upheld the CBP penalty and remanded the case back to CBP to determine the correct penalty amount.

What does this decision mean to importers? Reasonable care goes beyond requesting advice from a broker. In this case, the importer made several mistakes. First, he sent the broker product information on only one of the products, not the three that were in question and then used that provision for the other two. Second, he received three conflicting HTS provisions but chose the one with the lowest duty rate without questioning the broker on how he determined that this was the correct provision. The broker simply stating that they believe that the item was an insulated cooler bag of plastic after providing two possible provisions that covered some type of bag of man-made fiber was not sufficient to show that there was reasonable care by the importer.

In this case, a “reasonable importer” would have asked the broker why he had changed his mind, offering conflicting provisions. In addition, the importer could have asked the broker how best to address the conflict between provisions to ensure that he was using the correct classification for CBP purposes. Assuming the importer was unaware of the binding ruling process, the broker could have recommended that as the best way to address the issue.

Importers should understand that CBP at any time can question the classification of an imported product and more importantly, be prepared to substantiate how the HTS provision was determined with supporting documentation. Failure to substantiate and show that the company used reasonable care can result in a penalty case under 19 USC 1592. If you seek advice from your broker, consultant, attorney, etc. and they recommend a binding ruling it is likely the best way to show reasonable care.

Finally, what does this mean for brokers? CBP considers licensed brokers to be “experts” so it is important to ensure that you act as one. Be careful when providing advice to importers on classification, value, etc. Make sure you obtain all the information on the product or issue, do some research and provide the importer with a solid response. If you are uncomfortable with the issue or believe it is too complex, advise the importer to seek advice elsewhere or to obtain a binding ruling. Keep in mind that penalties can also be assessed by CBP on brokers and that an importer facing a penalty from CBP may be looking for a scapegoat.

If you have questions on this or any other aspect of “reasonable care” please let me know.